Good Volatility, Bad Volatility: Signed Jumps and the Persistence of Volatility

63 Pages Posted: 15 Oct 2011 Last revised: 18 Nov 2013

See all articles by Andrew J. Patton

Andrew J. Patton

Duke University - Department of Economics

Kevin Sheppard

University of Oxford - Department of Economics; University of Oxford - Oxford-Man Institute of Quantitative Finance

Date Written: November 16, 2013

Abstract

Abstract Using recently proposed estimators of the variation of positive and negative returns (“realized semivariances”), and high frequency data for the S&P 500 index and 105 individual stocks, this paper sheds new light on the predictability of equity price volatility. We show that future volatility is much more strongly related to the volatility of past negative returns than to that of positive returns, and this effect is stronger than that implied by standard asymmetric GARCH models. We also find that the impact of a jump on future volatility critically depends on the sign of the jump, with negative (positive) jumps in prices leading to significantly higher (lower) future volatility. We show that models exploiting these findings lead to significantly better out-of-sample forecast performance for forecast horizons ranging from 1 day to 3 months.

Keywords: realized variance, semivariance, volatility forecasting, jumps, leverage effect

JEL Classification: C58, C22, C53

Suggested Citation

Patton, Andrew J. and Sheppard, Kevin Keith, Good Volatility, Bad Volatility: Signed Jumps and the Persistence of Volatility (November 16, 2013). Economic Research Initiatives at Duke (ERID) Working Paper No. 168. Available at SSRN: https://ssrn.com/abstract=1943825

Andrew J. Patton (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

HOME PAGE: http://econ.duke.edu/~ap172/

Kevin Keith Sheppard

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom
+44 1865 616 613 (Phone)

HOME PAGE: http://www.oxford-man.ox.ac.uk

Register to save articles to
your library

Register

Paper statistics

Downloads
835
rank
27,215
Abstract Views
3,851
PlumX Metrics